In recent years, the United States saw a dramatic increase in the number of workers classified as independent contractors, along with the rise of the freelance economy and rapid development of technology. With independent contractors, businesses do not shoulder the cost and responsibilities involved with hiring employees, like paying federal Social Security and payroll taxes, providing workers’ compensation insurance, or ensuring compliance with numerous federal and state statutes and regulations. However, labeling someone an independent contractor, entering into an independent contractor agreement, or issuing a 1099 to a worker does not by itself determine whether an independent contractor classification is legal. Misclassification is costly and can expose businesses to wage and hour lawsuits and audits by governmental agencies.
So, who qualifies as an independent contractor under California law? Previously, California courts applied the Borello test, which looked at multiple factors to examine the total circumstances of the relationship between the business and the person performing the work. The most important factor was whether the business had a “right to control” the manner in which the worker performed the service. Other factors included whether the person performing the work was engaged in an occupation or business distinct from that of the company, the method of payment, whether the company or the worker supplied the equipment, tools, and the place for the person doing the work, and the skill required in the particular occupation. While the multi-factor test created some legal uncertainty, it allowed businesses to structure their relationships with independent contractors in such a way to best defend the classification if ever challenged.
However, on April 30th, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court departing from the multi-factor Borello test, and instead adopting a much narrower three-prong test for purposes of determining whether workers should be classified as employees or as independent contractors under the California wage orders. The California wage orders address various wage and hour laws such as minimum wage, overtime and meal and rest break requirements. Importantly, the Court did not review the appropriate standard for determining independent contractor status for other claims not based on the wage orders.
In Dynamex, the California Supreme Court adopted the Massachusetts “ABC test,” which requires companies to establish all three factors in order to legally classify a worker as an independent contractor. Those factors are:
- that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- that the worker performs work that is outside the usual course of the hiring entity’s business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business.
The “A” prong basically sets forth the common law test where the focus is on the level of control the hiring entity has over the worker. Notably, the Court cautioned that a business does not need to control the precise manner or details of the work in order to be found to have the same level of control that an employer typically has over its employees.
The “B” prong focuses on whether the worker provides services that are within the usual course of the hiring entity’s business. The example offered by the Court is a retail store that hires a plumber to repair a leak in a bathroom or an electrician to install an electrical line. Neither the plumber nor electrician is engaged in the usual course of the retail store’s business, and is therefore an independent contractor. On the other hand, the bakery that hires cake decorators or the clothing manufacturer that hires seamstresses are each hiring employees, even if they work from home, since the services are within the hiring entity’s usual business operations. This prong presents the biggest hurdle for many companies that have predominantly relied on independent contractors, such as Uber and Lyft.
The “C” prong addresses the issue of whether the worker made an independent decision to go into business for himself or herself. In other words, is the individual actively engaging in business with other entities and does the individual hold himself or herself out as an independent business. The fact that the hiring entity merely permits the worker to engage in business with others is not sufficient to establish that the worker is engaged in an independent business separate from the hiring entity.
It remains to be seen how California courts will apply the new “ABC” test. However, in light of the Dynamex decision, California businesses should carefully review their independent contractor classifications and assess their potential legal exposure.
To read more about the impacts of this decision, be sure to read this article.
Shannon Wolf, Esq.
The Law Office of Shannon Wolf
1201 Puerta del Sol, Suite 213
San Clemente, CA 92673
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